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12 Dec 2013
Approximately $958 million of debt affected
NOTE: On December 17, 2013, the press release was revised as follows: In the subheading, the amount of affected debt was changed from $958 billion to $958 million. Revised release follows:
New York, December 12, 2013 -- Moody's Investors Service, ("Moody's") has
downgraded to Ba2 from Ba1 the underlying rating on the Toll Road Investors
Partnership II LP's (TRIP II, or the project) Dulles Greenway Project
Revenue Bonds. The rating outlook is stable.
The downgrade to Ba2 reflects lackluster traffic growth; constrained
future toll rate increases and escalating debt service that we expect
will require stronger than historic traffic growth or larger rate increases
to achieve targeted metrics. The rating also reflects the project's
significant underperformance compared to original traffic and financial
projections; high leverage and back-loaded debt; weak
financial metrics and on-going public opposition to toll rates
and future rate increases particularly given already expensive tolls.
We expect that the project will be unable to meet future scheduled or
total debt service requirements through toll increases alone, though
the growing service area and high resident income levels should support
some traffic growth and toll increases over time.
Supporting the stable outlook is our expectation that the Virginia State
Corporation Commission (SCC), which regulates toll rates will continue
to approve annual increases that are at least on par with economic growth;
the project's flexible debt service schedule and its strong liquidity.
The flexible debt structure allows the project to comfortably cover its
mandatory debt service obligations (as opposed to its scheduled obligations)
with DSCR coverage of at least 1.30 times through the life of the
concession assuming annual traffic growth of 1% and annual rate
increases of 2.8%. However, total, or
scheduled debt service is not fully covered in certain years and accretes
steadily through final maturity. We estimate that current liquidity
would cover over three years of mandatory debt service and two years of
scheduled debt service.
TRIP II's bonds are insured and rated Baa1 based upon the financial strength
of the insurer, National Public Finance Guarantee (NPFG, rated
Baa1 stable, formerly MBIA).
The stable outlook reflects the expectation that traffic may continue
to experience additional declines given the federal government cuts and
budget uncertainties that may affect the Washington DC service area.
The outlook also reflects our expectation that financial margins will
continue to tighten as debt service escalates at a higher rate than revenue
growth. However at the lower rating level, the toll road
is expected to perform adequately if toll increases are implemented in
a timely fashion.
What Could Change the Rating --UP
Sustainable stronger traffic and revenue growth that improves DSCRs for
both mandatory and scheduled debt service could exert upward rating pressure
on the underlying rating, as would earlier repayment of debt.
What Could Change the Rating-DOWN
TRIP II's rating could face downward pressure if traffic growth remains
anemic over the near term or if rates are not increased to compensate
for the lower than necessary traffic growth. Uncertainty related
to the ongoing investigation initiated by the SCC in response to a tolling
policy complaint filed by a member of the Virginia House of Delegates
may impede the future ability to raise rates as necessary, which
is vital in the absence of stronger traffic growth to meet escalating
debt service requirements.
Despite some traffic stabilization in 2012 and through October 2013,
financial margins continue to tighten as traffic growth continues to lag
prior forecast. Average daily traffic was essentially flat in 2012
with 0.2 % growth over 2011, and up about 1%
through October 2013. This is in contrast to the six-year
trend of continuous traffic decline since a debt restructuring in 2005.
The project achieved a significant reduction in debt service between 2018
and 2021 thanks to the early retirement of approximately $19 million
of the 1999B Series in 2011 using accumulated reserves. In January
and February of 2012 an additional $15 million of Series 1999B
bonds maturing in 2018 and 2021 were retired early and these retirements
significantly reduce debt service requirements from 2018 to 2021;
however, debt service spikes up in 2022.
Given the flat traffic growth, TRIP II's financial performance
mostly reflects the sustained annual toll increases allowed under the
concession with additional increased as approved by the SCC. For
the first 10 months of 2013, the average toll increased to $4.35,
or 2.3%. While in previous years, toll increases
between 5% to 6% have resulted in traffic declines,
an 8% toll increase in 2012 resulted in no declines in total transactions
and an average toll increase of 2.3% in 2013 still allowed
for total transactions to growth at 1%. The flatter traffic
figures suggest that demand elasticity may be flattening.
Although 2012 cash flows available for debt service increased by 9.8%
thanks to toll increases, debt service continues to ramp up at higher
rates than revenues. As a result, the debt service coverage
ratio (DSCR) of total scheduled debt service in 2012 dropped slightly
to 1.15 times from 1.16 times in 2011. Total DSCR
is budgeted to fall to 1.04 times in FY 2013 and estimate that
it will just under one times in 2015 and 2016, while mandatory DSCRs
are expected to remain above 1.57 times.
Through 2011 the project had benefited from rate increases higher than
economic growth as approved by the SCC. Starting in 2013 through
2020 however, the increases are expected to be limited to the allowed
schedule of the greater of CPI +1%, GDP or 2.8%.
In 2020 the SCC and the partnership will revisit the toll structure,
and this adds additional uncertainty. We note that the road is
currently one of the most expensive in the US, with an average rate
per transaction of $4.35 in 2012 or about 32 cents per mile
compared to the adjacent Dulles Toll Road's average rate of $2.00
or 14.3 cents per mile. Though the SCC has demonstrated
continuous support for toll increases, which is a credit positive,
the allowance for toll increases after 2020 may be limited by public opposition
to significant increases on already expensive tolls.
Debt service is growing at higher rates than revenues. Total debt
service grew 13% in 2012 and will grow 7% annually from
2013-2015, which is higher than expected revenue growth from
allowed rate increases and 1% traffic growth. As a result,
financial margins will continue to tighten if revenue growth cannot keep
up with the project's growing debt service requirements.
The tightening of financial margins is partially mitigated by strong liquidity.
The project benefits from debt service and early redemption reserves equal
to maximum annual debt service and 50% of maximum annual debt service
respectively. The project has been depositing excess cash into
an early redemption reserve fund since 2008 as a result of its failure
to meets its restricted payments test of 1.25 times coverage.
Excess cash is not released until the project complies with the test ratio
for at least three consecutive years. At FY- end 2012,
the project had $39.7 million in the senior debt service
reserve fund and $46.8 million in the early redemption fund
and reserve. This provides a total coverage of close to two years
of the scheduled debt service and over three years of the mandatory debt
service obligations from 2013 to 2015. Other reserves include an
operating reserve funded at 50% of next year's operating expenses
currently at $5.5 million and an improvement fund for capital
expenses currently holding $4.9 million.
Though failure to make early redemptions does not constitute an event
of default, to the extent they are not made they will continue to
accrete interest, making future debt service requirements that much
more onerous. As it is, both mandatory and scheduled debt
service are heavily back-loaded, increasing to $69
million and $81 million respectively by 2034. Failure to
be current on early redemptions for four consecutive years triggers an
insurance event of default, but this carries no consequences until
2036, after which it provides the bond insurer the right to accelerate
the debt over a period of eight years.
TRIP II is a special purpose company that owns the Dulles Greeway,
a 14-mile long toll road extending westward through Loudoun County,
VA (rated Aaa) from Dulles Airport to the Town of Leesburg (rated Aa1).
TRIP II was given the rights to develop, construct, and operate
the road and to charge and retain tolls pursuant to a Certificate of Authority
granted by the Virginia SCC, which currently expires on the earlier
of final payment of the bonds or 10 years after the final maturity date.
TRIPP II was acquaired by Macquaries Infrastructure Group in September
The principal methodology used in this rating was Operational Toll Roads
published in December 2006. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
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Senior Vice President
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's downgrades Toll Road Investors Partnership II's underlying rating to Ba2 from Ba1 with stable outlook
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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